RT Journal Article
SR Electronic
T1 The Risk and Return Characteristics of the Buy-Write Strategy on the Russell 2000 Index
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 39
OP 56
DO 10.3905/jai.2007.682735
VO 9
IS 4
A1 Nikunj Kapadia
A1 Edward Szado
YR 2007
UL https://pm-research.com/content/9/4/39.abstract
AB This article is motivated by significant recent interest in the use of buy-write strategies for investment purposes. In light of this, the CBOE has introduced a number of buy-write indices based on a variety of equity indices such as the S&P 500, the Dow Jones Industrial Average, the Nasdaq 100 and, most recently in May 2006, the Russell 2000. This article constructs and evaluates returns on a buy-write strategy on the Russell 2000 index. The results demonstrate that the strategy has consistently outperformed the Russell 2000 index on a risk adjusted basis, when implemented with one month to expiration calls and when performance is evaluated using standard performance measures. The outperformance is robust to measures which specifically consider the non-normal distribution of the strategy's returns. However, the consistent performance advantage disappears when two month to expiration calls are utilized. On average, written calls end up in-the-money and transaction costs of writing the call at the bid further increases the losses.TOPICS: Mutual funds/passive investing/indexing, options, performance measurement